Home buyers today have an abundance of information available to them prior to getting serious about their home search, and for the most part, everyone is looking to get a great deal. Some of the many questions buyers ask themselves when looking to buy a home is: When is the best time to buy a home? How can I get the best deal? or, is now the right time to buy? In this post, we will try to shed some light on how buyers can put themselves in the best position to successfully become and stay a homeowner.
Buying a home is a major life decision. Understandably, most buyers are looking to get the most they can for their money.
There are many theories on how the real estate market works. Some argue the spring and summer months are the best time to buy, due to the increase in inventory. It is true that many sellers list in the spring and early summer months. Others say the fall and winter can be a better time to buy, as there is less competition from other buyers. Though both statements have valid points, the best time to buy really depends on how you can compete financially, and those change depending on the buyer.
Time and time again, we tell our clients that the best time to buy a home is when they are ready and it makes sense for them, both from a practical and financial standpoint, and this changes depending on the buyer’s financial situation. To cover this in greater detail, we will look at scenarios with two different buyers looking to purchase a property; One is a qualified FHA or VA buyer with a 3.5% down payment. The other is a well-qualified buyer with good credit, a conventional loan, and 20% for a down payment. But before we get into that, we must address the current market conditions.
Keeping up with the current real estate market is of vital importance when commencing your home search because it can give you insight into how to be competitive and separate yourself from other buyers. Getting familiar with the market will give us insight into how much leverage you have as a buyer so we can compete accordingly.
In hot real estate markets, such as the one we have experienced for the last several years, FHA and VA buyers typically have a hard time getting their offers accepted over conventional buyers with larger down payments. This was due to three significant factors:
We have seen a dramatic change in the real estate market since the beginning of 2022. Interest rates rose dramatically, and are still trending up. In January, buyers were closing on mortgages with interest rates in the high 3% range. This September and October, we saw interest rates hit 7% and higher. The change in rates has put a significant damper on potential buyers trying to enter the market. To make matters worse, prices have yet to catch up to the market adjustment, leaving buyers with higher rates and high property prices. However, this market presents a great opportunity for buyers that are still looking to become homeowners.
In every market, there are buyers that NEED to buy, and sellers that NEED to sell. Some sellers that don’t NEED to sell will have the ability to cancel their sales and wait for a better market. We have seen an immense increase in owners choosing to rent their properties rather than sell them in the past few months. However, some sellers will not have a choice, either due to relocation, work, divorce, buyer’s remorse, or any number of reasons. With property inventory building, some sellers that NEED to sell will make the appropriate adjustments with respect to price and negotiating. Last year, we would have never suggested a buyer request closing costs or anything similar, because the competition was fierce and there were A LOT of well-qualified buyers in the market. That is no longer the case. In this changing market, you can expect:
One of the major benefits of the changing market is sellers are usually willing to cover closing costs for buyers. This is significant for Buyers with low down payments, as closing costs can be several thousand dollars. Typically, a lender will require the buyer show funds for both the down payment and closing costs. If a seller is willing to pay for a buyer’s closing costs, that frees up thousands of extra dollars that the buyer can use for a lower rate, increase the down payment, future upgrades, or simply keep as reserves.
Related: First-Time Homeowners Guide to Affordable Home Ownership
This market has proven to be much more level with respect to who has the negotiating leverage. Sellers are now much more willing to perform repairs, offer credits for closing costs, and even buying down the Buyer’s interest rate! This is largely because most properties are not seeing multiple offers, especially during the first week on the market. Less competition from buyers, especially well-qualified buyers with large down payments and conventional financing, means more opportunity for buyers with FHA and VA loans.
With properties sitting on the market and buyers having options with growing inventory, Sellers have lost a significant amount of leverage over Buyers because they simply don’t have multiple buyers to choose from. An offer from ANY buyer (FHA, VA, requesting Owner Financing, etc.) that makes sense for the seller should be considered in most cases. The important factors to keep in mind are the property’s functionality for the foreseeable future and your financial ability to afford the property, which we will cover more in the Interest Rates section further down.
If you were shopping for a home in recent years but became discouraged due to the competition, you may reconsider speaking with your lender and getting an updated preapproval letter, because some buyers are getting great deals from sellers that need to sell. We have seen everything from sellers covering all buyer closing costs, to buying down interest rates for the first two years, performing requested repairs, and/or providing credits. As mentioned above, this leaves you with more money in your pocket and options on how to invest it: buy down your rate, increase your down payment, or simply keep it as reserves for future expenses.
In short: You will likely spend less to get into a home now than you would have last year. Once spring hits, however, things could change, as more buyers tend to enter the market. The winter market is likely where the best deals will be made.
VA and FHA buyers have gained significant leverage due to the lack of buyers in the market. It is much easier to negotiate with a seller when you are the only offer on the table as opposed to competing with other buyers. The fewer options a seller has, the more leverage the buyer gains. And just as these buyers have gained leverage, Conventional Buyers have gained even more leverage.
Conventional buyers are still the preferred buyer for many sellers. We mentioned these reasons previously but will reiterate the important aspects again:
As long as interest rates continue to climb, buyer demand will remain dampened and that means EVERY buyer in this market has much more leverage than they did 12 months ago. The major difference is the interest rates.
The FED has steadily increased interest rates since the beginning of the year in an attempt to curb inflation. Still, the changes to the real estate market were more significant than expected, resulting in roughly a 40% drop in home sales. The drastic increase in rates caused many buyers to pause their home search because the numbers just did not make sense for those who were already at the top of their budgets. However, with home sellers having less leverage, buyers have been getting great deals, even with higher rates.
If your budget for a mortgage is $3,500/month, your affordability went from $450,000 at 4.5% interest to $350,000 at 7.5% interest. The difference in price is a bit shocking, but consider the following: in a hot market with low-interest rates, homes are often selling for higher than the asking price. So using the same budget of $3,500/month, a home listed for $425,000 that sold for $450,000 in a hot market will cost you the same as a home listed for $375,000 that sells for $350,000 in a changing market. We have yet to see prices come down enough to recapture the majority of buyers’ attention, but it seems the market is slowly working in that direction. It is not uncommon to see a home sell for 10% below its original asking price while the market is in transition, especially if it was overpriced to begin with.
As a buyer, your mentality should be on the future, not the past; 3-5% interest rates are gone. They don’t think about you, so there is no point in thinking about them. Instead, focus on the market trajectory. Buyers will continue to gain leverage over sellers as long as rates climb or remain stable. The FED is predicting MORE rate hikes in the coming months, so rates are much more likely to increase over the foreseeable future rather than decrease. Unless you are saving for a down payment, now is a great time to buy a home. If you’re kicking yourself for not buying last year and are deciding to wait, you will find yourself in a similar situation month from now.
As a home buyer looking to secure housing, you would be much better off buying a home NOW, and managing the rate until they come back down, or enjoying the benefits of a LOWER rate while rates continue to rise. “Marry the house, date the rate.” If rates go up, you’re saving money by securing a lower interest rate. If rates go down? Refinance and lower your payment. Use the equity or keep it in the property.
As mentioned throughout the article, the best time to buy a home is when it makes sense for YOU. Look at your finances and talk to your lender to determine what you can afford. Once you have your budget, the real search can begin, along with negotiating with the seller for a great deal. If they are in a “Need to sell” position, odds are we will be able to secure a fantastic deal!
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